For beginner traders and even those experienced in cryptocurrencies, one question still puzzles many of them. “Why are crypto prices different on exchanges?” In this article, I will answer this question and once and for all, explain “Why is it one cryptocurrency can be valued differently on different platforms?“.
Some of these factors include the supply and demand dynamics of open markets as well as liquidity and the environment within which crypto are traded. Keep reading as I explore these factors.
Reasons for Crypto Prices Difference Between Exchanges
As we look at this variation in prices, a few factors come to the forefront. Here, I aim to demystify the world of crypto pricing and valuation.
No Standard Price, or Centralized Control
Crypto trades are decentralized and occur depending on what the user is wiling to spend on a specific crypto and how much the seller is willing to accept. These peer-to-peer transactions occur in an exchange once the upper and lower limits are identified, the price is decided.
Prices are based purely on supply and demand and are set according to a recently traded price based on prior transaction history.
Cryptocurrency is traded on the openmarket where prices are determined by supply and demand. Buyers and sellers set the price through their trades meaning the price of a crypto may differ on exchanges due to the supply and demand on each exchange.
Some exchanges may be influenced by geographic location meaning they focus on specific regions. They may aim to attract traders from specific countries or regions and are a reflection of local market sentiment. Additionally, regulatory factors in certain locations can influence crypto prices on exchanges.
Most exchanges charge a transaction fee which will affect the price of cryptocurrencies on an exchange.
These service fees add an extra layer of inaccuracy to the final trading price. The average fee charged on exchanges is between 0,1% and 0,2% of your entire trade. Other exchanges such as Coinbase Pro is one of the cheapest exchanges if you need to buy crypto with fiat currency.
This the practice of buying crypto cheaply from one exchange and selling it at a higher price on a different exchange. This contributed to price volatility as traders experienced in arbitrage may affect the supply and demand of crypto depending on which exchange they are buying and selling on. Arbitrage may help balance out the prices on exchanges but can also lead to discrepancies.
Ease of Liquidity
Liquidity refers to how easily it is to trade a specific crypto without majorly affecting the price. The liquidity of a crypto market on an exchange can play a big role in determining its price.
Higher trading volumes in an exchange result in greater liquidity so large orders can be transacted without significantly impacting the price. The more liquid a crypto market is, the closer it aligns to the broader market.
Smaller exchanges however are less liquid and may experience greater price fluctuations. This is a result of lower trading volumes and fewer traders actively using the exchange.
Varying Regulatory Environments
Regulations affect the crypto trades and hence, their prices on exchanges. Some exchanges may choose to operate in areas with more restrictive or favorable regulations. Trading activity can be influenced by these restrictions and will affect the demand and supply of crypto and consequently, their prices.
Each exchange is unique with different trading pairs,security features, user interfaces and trading features. This will influence the type and number of traders who use the exchange and their activities will determine supply and demand of crypto, and as a result, their prices.
Different Time Zones
Even if exchanges trade 24 hours a day, different time zones meaning traders are only active during specific hours. These varying levels of participation can result in price discrepancies due to varying levels of trading activity.
Many traders automate their trading strategies by using algorithmic trading bots. They read prices on different exchanges and automatically react to these changes. When they respond to changes in price, it may create imbalances in supply and demand on various platforms and consequently result in different prices.
It is advisable to compare crypto prices on different exchanges before making a trade. Websites such as CoinMarketCap make this possible. Using the site, you can compare crypto prices from different exchanges. Do this by searching for a specific crypto in the search box and then select the ‘Markets’ tab to see the price on various exchanges. This is shown in the image below.
At the time of writing, Bitcoin’s price on Coinbase was $27,830.53 while the price on Binance is $26,970. The reason for this difference is the effect of liquidity and presence of regulations. Coinbase has higher liquidity and is regulated by the US government which means it is more trustworthy and reliable. Binance has less liquidity hence the lower price of Bitcoin.
If you are a trader and confused about the Bitcoin price difference between exchanges, a good starting point is to figure out what kind of trader you aim to be. You can then find the specific exchange that caters to your specific needs.
Users need to recognize the decentralized and dynamic nature of cryptocurrencies. They could be a source of profit from arbitrage opportunities but also present challenges for traders.
When considering “Why do crypto exchanges have different prices”, consider factors such as liquidity, regulations, geographical factors and time zones as they influence crypto prices and could help determine the success of your trades.
The market continues to mature and may gradually become more uniform and stable with the price differences diminishing. Improved infrastructure and technological innovations may help align crypto exchange prices.